In what may be seen as another blow to the buy to let market but the Bank’s Financial Policy Committee (FPC) says that some lenders are applying ‘weaker’ standards when it comes to applications in this sector.
The FPC also believes that the rapid rise in buy to let lending, while likely to slow when the new stamp duty levy comes into play on 01 April, the sector is still not without potential threats in terms of financial stability.
So there will be stricter affordability checks. Landlords with four or more properties will be expected to declare the rental income they expect to receive from tenants and also their own income and spending habits. This is to ensure they can still afford the mortgage if a tenant defaults on their rent or the property is left vacant.
Landlords will also have to prove they can cope if interest rates rise sharply and can afford all the costs associated with renting out a property. This includes tax, which will rise on buy to let properties from next year.
‘The FPC remains alert to potential threats to financial stability from rapid growth in buy to let mortgage lending,’ the statement says, showing that the outstanding stock of buy to let mortgages has risen by 11.5% in the year to the fourth quarter of 2015.
‘The macro prudential risks centre on the possibility that buy to let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress,’ the FPC explains.
‘The FPC welcomes and supports the Supervisory Statement issued by the Board of the Prudential Regulation Authority (PRA) to clarify its expectations for underwriting standards in this market, including guidelines for testing the affordability of interest payments,’ it points out.
‘The PRA's review of lenders' plans revealed that some lenders are applying standards that are somewhat weaker than those prevailing in the market as a whole. The PRA's action is a prudent supervisory measure intended to bring all lenders up to prevailing market standards. It will guard against any slipping of underwriting standards during a period in which rapid growth plans could be challenged by the impact of forthcoming tax changes,’ it adds.
The FPC statement also points out that the growth of buy to let mortgage lending is likely to slow in the second quarter of this year as changes to stamp duty take effect and that forthcoming changes to mortgage interest tax relief and the implementation of the PRA Supervisory Statement will probably dampen growth further.
‘The FPC will continue to monitor closely these developments and potential threats to financial stability from the buy to let mortgage market,’ it adds.
The Treasury has consulted on giving powers of direction to the FPC on buy to let mortgage lending, and the FPC said that it will prepare a statement of its policy for the use of powers of direction ahead of any such powers being approved by Parliament.
According to Camilla Dell, managing partner at independent property buying agency, Black Brick it is a sensible step by the Bank of England. ‘No one should borrow more than they can afford. Look at what happened in Dubai, there were lots of speculative investors who were highly leveraged and the market had an almighty crash. This is the last thing the UK property market needs and taking these steps will ensure it is much more stable going forwards, which is good news for both existing property owners and future buyers,’ she said.
‘It also means that buy to let will become an investment for more liquid, wealthy, or cash buyers. When you do the maths, leveraging at around 50% or less still makes sense, but no higher than that. Most of our clients fall into that category and will be well placed to invest,’ she added.
But she warned that another outcome of the changes may also be a reduction in the number of buy to let properties, which could result in rents rising.
David Cox, managing director of Association of Residential Letting Agents (ARLA) said it is another blow to the landlords. 'Whilst we recognise the need to look at the important issue of affordability, the proposed measures are far too tough and are yet another assault on the rental market,' he commented.
'Something urgently needs to be done to make the prospect of being a buy to let landlord appealing again, or the vicious cycle of supply and demand is only going to get worse and worse,' he added.
Andrew Giller, director at the House Partnership, also believes that it could affect the housing market. ‘If you can’t buy because the amount of deposit required by banks is so large, then the only option is to rent, but if landlords can’t buy properties to rent out, there will be no one buying the houses and the rental stock available for tenants will also decline,’ he explained.
‘This leaves potential for the market to grind to a halt, therefore, reducing the revenue for the government. I would suggest that this is still a banking issue rather than a property issue,’ he added.
David Hollingworth, from mortgage broker London & Country, said that it makes common sense but it will make it harder to get a buy to let mortgage. ‘Increasingly landlords will be feeling they are coming under fire from all directions. This might affect their decision to become a buy to let landlord or to expand their portfolio,’ he added.
Lenders will no be able to give their views to the PRA. Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA) pointed out that the aim of making best practice an industry standard is commendable, as is the pursuit of a sustainable approach to buy to let lending.
'On the face of it, most lenders will have little to fear from these proposals, especially given that many have already undertaken similar assessments. However, it is important that these rules do not set minimum standards at a level any higher than is necessary to achieve a sustainable level of activity,' he said.
'Buy to let plays a significant role in supporting the private rental sector to meet housing demand from the UK’s growing population. The consultation needs to bear in mind their potential effects on the supply of rented property and levels of rent, factors which are oddly excluded from the impact assessment,' he explained.
'This is critical at a time when buy to let is already feeling the full force of regulatory layering, with changes to stamp duty and mortgage tax relief underway and the debate ongoing about the macro prudential controls which are still to be introduced. We assume the PRA standards and any FPC requirements will be aligned but we now have a further period of uncertainty before that can be clarified,' he added.
'We would also caution against a broad brush one size fits all approach that risks dumbing down the market. It is encouraging that the rules include some flexibility for lenders to use other disposable income in affordability assessments. To make the proposals practical, the consultation should consider how lenders will need to model landlords’ costs and also how they calculate the level of rent for affordability assessments,' he concluded.
